CITATION: Hornstein v. Orbach, 2016 ONSC 1458

DIVISIONAL COURT FILE NO.: 303/13, 304/13, 305/13 DATE: 20160527

ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT

BETWEEN:

Daniel Hornstein

Plaintiff/Respondent/ Cross-Appellant

– and –

Lila Orbach

Defendant/ Appellant/Cross-Respondent

Stephen R. Dyment, for the Plaintiff/Respondent/Cross-Appellant

No Appearance

HEARD at Toronto: February 25, 2016

Stewart J.

[1] Daniel Hornstein (“Hornstein”) brings three cross-appeals from three judgments of Deputy Judge Mungovan dated June 6, 2013 following a consolidated trial in Small Claims Court.

[2] Lila Orbach (“Orbach”) had brought appeals of these same judgments. These appeals were not pursued by her and have been dismissed. Only Hornstein’s cross-appeals remain to be addressed.

[3] Orbach does not take any position on these cross-appeals. Neither she nor anyone on her behalf attended on the cross-appeals to make submissions, nor was any responding material filed by her.

Jurisdiction

[4] An appeal lies to the Divisional Court from a final order of the Small Claims Court. Such appeal is to be heard by a single judge (see: s.3 and s.21 (2) (b) of the Courts of Justice Act, R.S.O. 1990, c.C.43).

Standard of review

[5] The standard of review in an appeal of a final order of a judge is set out in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235. On questions of law, the standard is correctness. On questions of fact, the standard is palpable and overriding error. On questions of mixed fact and law, there is a spectrum where there is an extricable legal principle, the standard of review is correctness. However, which respect to the application of the correct legal principles to the evidence, the standard is palpable and overriding error.

Background

[6] These three actions were consolidated and heard together by the trial judge.

[7] The issues determined at trial in each action involved the proper accounting by Orbach with respect to power of sale proceedings conducted by her pursuant to three mortgages from Hornstein given in 2006 on Units 803, 804 and 1604 in a co-operative apartment building at 235 Grandravine Boulevard, Toronto. The mortgages went into default and Orbach took legal proceedings as a result. Hornstein claimed that surplus funds from the resulting sales of the units were owing to him.

[8] In Small Claims Court Action No. 305/13 (dealing with Unit 803), the trial judge determined that Orbach’s accounting was faulty and ordered judgment in favour of Hornstein in the amount of $14,105.05, plus prejudgment interest at the rate of 1% per annum and post-judgment interest at 3% per annum.

[9] In Small Claims Court Action No. 304/13 (dealing with Unit 804), the trial judge determined that Orbach’s accounting was faulty and ordered judgment in favour of Hornstein in the amount of $9,545.54, plus prejudgment interest at the rate of 1% per annum and post-judgment interest at 3% per annum.

[10] In Small Claims Court Action No. 303/13 (dealing with Unit 1604), the trial judge determined that Orbach’s accounting was faulty and ordered judgment in favour of Hornstein in the amount of $13,508.51, plus prejudgment interest at the rate of 0.8% per annum and post-judgment interest at 3% per annum.

[11] The trial judge outlined the relevant facts with respect to each of the mortgages, the defaults by Hornstein and the actions taken by Orbach to realize on the security of the mortgages in default. These actions included delivery of Notices of Sale, sale of each unit, arrangement of vendor take-back mortgages, re-sales of the units and the delivery of a mortgage accounting with respect to each unit.

Issues

[12] None of the findings of fact made by the trial judge are disputed by Hornstein.

[13] Hornstein raises 3 issues for consideration on these appeals:

(a) Did the trial judge err in making certain calculation errors in determining the full amounts retained by Orbach from the proceeds of sale of each unit?

(b) Did the trial judge err in awarding interest on the judgments at the rates determined? and

(c) Did the trial judge err in allowing to Orbach a three month bonus mortgage interest payment with respect to each property?

calculation errors

[14] The errors pointed out on appeal by Hornstein are simple calculation errors that omitted provision for interest on the surplus proceeds of the sales which were received and retained by Orbach. As noted above, no dispute has been raised by Orbach with respect to these adjustments.

[15] Accordingly, the following adjustments are required to be made to the amount of each judgment:

(a) For Unit 803, interest collected by Orbach on the surplus proceeds of sale in the amount of $2551.02 should be added to the judgment in Action No. 305/13;

(b) For Unit 804, interest collected by Orbach on the surplus proceeds of sale in the amount of $1417.08 should be added to the judgment in Action No. 304/13; and;

(c) For Unit 1604, interest collected b Orbach on the surplus proceeds of sale in the amount of $2141.03 should be added to the judgment in Action No. 303/13.

interest

[16] Hornstein has characterized these judgments in his favour as representing amounts wrongfully retained by Orbach from proceeds of sale and therefore seeks a higher rate of interest than that which was awarded by the trial judge to reflect that description. He submits that the trial judge erred in limiting the interest on the judgments to the rates he awarded.

[17] The trial judge ordered interest on the judgments pursuant to sections 30(1) and 128 of the Courts of Justice Act, R.S.O. c.C. 43. A trial judge in these circumstances has very wide discretion to fix a rate of interest considered to be appropriate.

[18] The reasons of the trial judge reflect a full understanding of the nature of the issues between the parties. In my view, the trial judge in this case made no error in principle in setting the interest rates as he did. There is no basis to justify interfering with his decision in that regard.

three month BONUS MORTGAGE INTEREST payment

[19] The trial judge also allowed Orbach a three month mortgage interest bonus payment with respect to each unit. This determination correspondingly reduced the amount of surplus proceeds of sale otherwise owing to Hornstein and the quantum of each judgment.

[20] The trial judge articulated this issue as follows:

In the Notice of Sale issued by the first mortgagees (Mr. and Mrs. Orbach) there appears a charge for “three months bonus interest as per section 17 of the Mortgages Act” in the amount of $1,490.28. The question is whether a mortgagee is entitled to this bonus with respect to a mortgage in default after the mortgagee has issued a Notice of Sale.

[21] In reaching his conclusion as to Orbach’s entitlement to obtain this three month bonus mortgage interest payment in each case, the trial judge relied primarily on section 17 of the Mortgages Act, R.S.O. 1990, c. M.40.

[22] Section 17 provides as follows:

Payment of principal upon default

17.(1) Despite any agreement to the contrary, where default has been made in the payment of any principal money secured by a mortgage of freehold or leasehold property, the mortgagor or person entitled to make such payment may at any time, upon payment of three months interest on the principal money so in arrear, pay the same, or the mortgagor or person entitled to make such payment may give the mortgagee at least three months’ notice, in writing, of the intention to make such payment at a time named in the notice, and in the event of making such payment on the day so named is entitled to make the same without any further payment of interest except to the date of payment.

Exception

(2) If the mortgagor or person entitled to make such payment fails to make the same at the time mentioned in the notice, the mortgagor or person is thereafter entitled to make such payment only on paying the principal money so in arrear and interest thereon to the date of payment together with three months interest in advance.

Saving

(3) Nothing in this section affects or limits the right of the mortgagee to recover by action or otherwise the principal money so in arrear after default has been made.

[23] The trial judge determined that s. 17 applies to power of sale proceedings and thereby entitled Orbach, as mortgagee, to claim and receive an additional three month bonus interest payment from Hornstein for each unit.

[24] The facta submitted on behalf of Hornstein in these three appeals set out the basis upon which is submitted that the trial judge erred in law in his application of s. 17 of the Mortgages Act to the particular facts of these cases.

[25] The arguments advanced on behalf of Hornstein acknowledge what appear to be conflicting authorities on this issue.

[26] In short, I agree with Hornstein’s position that the provisions of s. 17 upon which the trial judge relied apply only to the rights of a mortgagor where default in the payment of principal secured by a mortgage of freehold or leasehold property has occurred prior to maturity of the mortgage. In the case of these mortgages, all had matured and the properties had been made the subject of power of sale proceedings.

[27] The Notices of Sale are the only documents referred to by the trial judge as having been relied on by Orbach in support of her claim to entitlement of the three months bonus interest payment for each mortgage. A Notice of Sale does not create a right to payment in favour of a mortgagee if the mortgagee does not otherwise have or possess, whether under the Mortgages Act, another statute or the mortgage itself, any such right. A Notice of Sale is only a notice required by the Mortgages Act as a condition to be satisfied prior to the enforcement of the rights of the mortgagee pursuant to the power of sale provisions contained in a mortgage.

[28] The authorities relied upon by the trial judge in arriving at the conclusion that Orbach, having exercised power of sale on these properties secured by mortgages that had matured and gone into default, involved scenarios different from this one. Most of the decisions which granted to a mortgagee an entitlement to a three months bonus interest payment involve a mortgage agreement which contains a specific provision providing for such three month bonus interest payment to be paid by the mortgagor in the event of a default or prepayment (see: Lister Property Corp., LIUNA Local 837 v. 810322 Ontario Ltd. [2006] O.J. No. 3260; Piesok v. Johnson, [2101] O.J. No. 900; 1259121 Ontario Inc. v. Canada Trust Co. [2003] O.J. No. 1007).

[29] The leading authority in Ontario on the issue of entitlement of a mortgagee to an additional three months bonus of interest is O’Shanter Development Co. v. Gentra Canada Investments Inc., 1995 10674 (ON SC), 1995 Carswell Ont 399 (Ont. Div. Ct.).

[30] The reasons of Saunders, J. in O’Shanter make specific reference to paragraph 5.2 of the applicable mortgage agreement between Elkhorn Apartments Limited as mortgagor and Royal Trust Corporation of Canada as mortgagee. O’Shanter Development was in the position of second mortgagee, and the first mortgage had been assigned by Royal Trust to Gentra Canada Investments Inc. That provision of the mortgage in issue stated:

5.2 If prepayment of any part of the Principal Sum is made prior to the Maturity Date, whether by reason of payment after acceleration upon the occurrence of an Event of Default, or as otherwise permitted hereunder, the Mortgagor to indemnify and save harmless the Mortgagee from all costs and losses resulting therefrom and to pay to the Mortgagee the greater of:

(a) three months’ interest on the Principal amount prepaid at the Applicable Rate of interest payable at the time of prepayment as hereinbefore set out; and

(b) the full amount of any reasonable cost, loss, expense, penalty or charge incurred or suffered by the Mortgagee as a result of such prepayment.

[31] Saunders, J. concluded that, under the terms of the mortgage in this case, the mortgagor had permission to prepay principal in whole or in part upon payment of the prepayment amount (i.e., three months interest). This prepayment amount provided compensation to the mortgagee similar to that provided by the rules of equity as codified in s. 17 of the Mortgages Act. As s. 17 overrides the mortgage contract upon default, O’Shanter could have given notice or made the payment provided for in s. 17 and thus avoided the contracted prepayment amount, provided Gentra had not by then realized on its security.

[32] In O’Shanter, the party standing in the place of the mortgagor was attempting to redeem the mortgage prior to maturity without payment of any prepayment amount. Because three months’ notice of intention to redeem as permitted by s. 17 had not been given, which could have been done but was not done, it was required to make all payments called for under the mortgage at the time of redemption.

[33] Saunders, J. stated that a mortgagor should be required to fulfil his proper contractual obligations as a condition of redemption.

[34] Saunders, J. further observed that the mortgagee should not receive more than he is entitled to at the time of redemption if he elects to realize on his security.

[35] O’Shanter is therefore authority for the proposition that, with respect to redemption prior to maturity, the terms of the particular mortgage agreement must be considered before there can be any reliance on s. 17 of the Mortgages Act.

[36] In my view, this is consistent with one of the apparent legislative purposes of s. 17: to protect mortgagors from unduly onerous and unfair terms of mortgage agreements that might require a bonus of interest on default in excess of three months, and also provides mortgagors in default with the opportunity of avoiding payment of any interest bonus interest by giving three months’ notice.

[37] It was pointed out on Hornstein’s behalf that the trial judge did not refer in his reasons to s. 8 of the Interest Act, R.S.C. 1985, c. I-18. In addition, no reference was made to the decision in Mastercraft Properties Ltd. V. El EF Investments Inc., 1993 8545 (ON CA), 1993 Carswell Ont 614 (Ont. C.A.). The Court of Appeal in Mastercraft considered the relationship between s. 8 of the Interest Act and s. 17 (formerly s. 16A) of the Mortgages Act, and dealt with the issue of whether or not after maturity a provision providing for payment of a bonus of three months interest, in addition to principal and accrued interest, is valid and enforceable.

[38] In Mastercraft, McKinlay, J.A. (referring to a line of cases dealing with covenants to pay additional interest on default that were held invalid) stated (at paras. 12 and 13):

Some cases dealt with default occurring at maturity of the mortgage, where the mortgagee claimed or attempted to enforce a covenant to pay three month’s interest in addition to payment of interest in full up to the time of repayment of principal. The covenants in those cases did not provide an alternative of simply giving three months’ notice of payment.

In all of the above cases the amount claimed would clearly constitute a penalty for default and result in increasing the interest on the arrears beyond the mortgage rate, thus contravening the provisions of s. 8.

[39] In his decision in Ialongo v. Serm Investments Ltd., (2007 Carswell Ont 1246), Brown, J. cited O’Shanter and articulated this relationship between s. 17 of the Mortgages Act and the corresponding terms of the mortgage agreement at issue:

In my view, the reasoning in O’Shanter Development is consistent with the view expressed by the Court of Appeal in Mastercraft, supra, that the rights afforded by s. 17 are options made available to the mortgagor on default: it can give notice or pay the bonus prior to the expiry of the notice period. Once however, the mortgagee takes steps to realize on its security, such as by issuing a notice of sale…. it cannot convert the rights of the mortgagor under s. 17 into obligations of the mortgagor upon the realization of the security. The amounts a mortgagee may demand from a mortgagor upon realization are those spelled out in the mortgage, not in s. 17 of the Mortgages Act.

[40] As a result, and applying this same reasoning, I am of the opinion that the trial judge erred in law by giving Orbach a credit of three months interest on these fully matured mortgages.

[41] Accordingly, the amounts of the three judgments should be increased to reflect this determination, as follows:

(a) For Unit 803, the judgment in Action No. 305/13 should be increased by $1,490.28;

(b) For Unit 804, the judgment in Action No. 304/13 should be increased by $1,611.51; and

(c) For Unit 1604, the judgment in Action No. 303/13 should be increased by $1,549.99.

CONCLUSION

[42] For these reasons, the cross-appeals are allowed in part to provide for the calculation adjustments set out in paragraph 15 above and to increase each judgment by an amount equivalent to the three month bonus mortgage interest payment for each unit as set out in paragraph 40 above.

[43] Pre-judgment interest on the revised amounts shall be at the rates as determined by the trial judge.

costs

[44] Hornstein seeks costs of these cross-appeals in the aggregate amount of $27,734.34.

[45] Materials and facta were required to be prepared and filed for each of these cross-appeals. The issues raised involved serious points, although the amounts of money are modest. Disbursements of approximately $4000.00 were incurred by Hornstein in advancing his cross-appeals.

[46] Taking into account all of these factors, as well as the other considerations relating to the exercise of discretion in determining costs, I consider a fair and reasonable amount to award Hornstein for costs of these cross-appeals is $12,500.00, all-inclusive. That sum shall be payable to him by Orbach forthwith.

___________________________ Stewart J.

Released: May 27, 2016

CITATION: Hornstein v. Orbach, 2016 ONSC 1458

DIVISIONAL COURT FILE NO.: 303/13, 304/13, 305/13 DATE: 20160527

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

BETWEEN:

Daniel Hornstein

Plaintiff/Respondent/ Cross-Appellant

– and –

Lila Orbach

Defendant/ Appellant/Cross-Respondent

REASONS FOR DECISION

Stewart J.

Released: May 27, 2016